The Office of General Counsel issued the following opinion on May 22,
2003, representing the position of the New York State Insurance Department.

Re: Service Fees and Reductions in Commissions

This is in response to your e-mail inquiry dated April 30, 2003 and our
telephone conversation on May 15, 2003.

Questions Presented:

1. Is an insurance agent selling property/casualty insurance permitted
to obtain a fee from an insured that is in addition to, or in lieu of, a commission?

2. Is the law on the foregoing question the same for "retail"
agents, managing general agents, and excess line brokers?

Conclusions:

1. N.Y. Ins. Law § 2119(a) (McKinney 2000) prohibits an insurance
agent from charging insureds service fees for the placement of insurance. Unlike a broker
who represents the insured, the agent represents the insurer and, consequently, may
receive compensation only from such insurer in selling insurance.

N.Y. Ins. Law §§ 2314 and 2324(a) (McKinney 2000 and Supp. 2003)
would prohibit an insurance agent (or an insurance broker) from quoting property/casualty
insurance on a "net of commission" basis, whereby the quoted premium is reduced
by an amount proposed to be the insurance agents (or insurance brokers)
commission, or from substituting service fees in place of the earned commission.

2. The law concerning fees is the same for "retail agents"
and "managing general agents" because both are licensed as insurance agents as
defined in N.Y. Ins. Law § 2101(a) (McKinney 2000). A "Surplus lines" broker is
known in New York as an excess line broker, and is licensed pursuant to N.Y. Ins. Law §
2105 (McKinney Supp. 2003), which requires that such brokers also be licensed as insurance
brokers pursuant to N.Y. Ins. Law § 2104 (McKinney Supp. 2003). As brokers, they are
subject, as are agents, to the same prohibitions on rebating and making unlawful
inducements to insureds to purchase insurance. However, brokers, unlike agents, may also
charge the insured a service fee, in addition to, not in lieu of, any commission, provided
there is a written memorandum signed by the insured, specifying the amount of the fee,
pursuant to N.Y. Ins. Law § 2119(c) (McKinney 2000).

Facts:

None are presented.

Analysis:

An insurance agent may not receive compensation directly from an
insured for selling insurance, regardless of whether the insured agrees to pay a fee for
such sale. There is no separately designated license for "retail agent" or
"managing general agent." Under the law, both would need to be licensed as
insurance agents as defined in N.Y. Ins. Law § 2101(a) (McKinney 2000).

N.Y. Ins. Law § 2314 (McKinney 2000) provides:

No authorized insurer shall, and no licensed insurance agent, no
employee or other representative of an authorized insurer, and no licensed insurance
broker shall knowingly, charge or demand a rate or receive a premium which departs from
the rates, rating plans, classifications, schedules, rules and standards in effect on
behalf of the insurer, or shall issue or make any policy or contract involving a violation
thereof.

As a general rule, agents act on behalf of and represent insurers, and
consequently, may receive their compensation only from such insurers. See Wolcott
B. Dunham, Jr., New York Insurance Law § 19.01-02 (1990). The insurance company
and the insurance agent determine between themselves the amount of commission that the
insurance company will pay the agent. This expense to the insurance company is part of its
projected expenses that in regards to property/casualty insurance, are generally filed
with the Superintendent as part of the rate filings made in accordance with Article 23 of
the New York Insurance Law. See N.Y. Ins. Law § 2304(a) (McKinney 2000). Producer
commission, as a past and prospective expense, is a factor upon which the rate is based,
even if the rates and rating plan for the policy are not required to be filed with the
Superintendent. Commissions are included in the premium charged the insured. Since such
premium rates are based, in part, on commission payments, the insurance agents (or
insurance brokers) earned commission may not be subtracted from the premium, which
would therefore be an unlawful deviation from the rates in effect. N.Y. Ins. Law § 2314
(McKinney 2000).

Commission sharing with the insured or otherwise reducing the premium
is known as rebating, a violation of N.Y. Ins. Law § 2324(a) (McKinney Supp. 2003), which
states:

No authorized insurer, no licensed insurance agent, no licensed
insurance broker, and no employee or other representative of any such insurer, agent or
broker shall make, procure or negotiate any contract of insurance other than as
plainly expressed in the policy or other written contract issued or to be issued as
evidence thereof, or shall directly or indirectly, by giving or sharing a commission or
in any manner whatsoever, pay or allow or offer to pay or allow to the insured or to any
employee of the insured, either as an inducement to the making of insurance or after
insurance has been effected, any rebate from the premium which is specified in the policy,
or any special favor or advantage in the dividends or other benefit to accrue thereon or
shall give or offer to give any valuable consideration or inducement of any kind, directly
or indirectly, which is not specified in such policy or contract, other than any
article or merchandise not exceeding fifteen dollars in value which shall have
conspicuously stamped or printed thereon the advertisement of the insurer, agent or
broker, or shall give, sell or purchase, or offer to give, sell or purchase, as an
inducement to the making of such insurance or in connection therewith, any stock, bond or
other securities or any dividends or profits accrued thereon, nor shall the insured,
his agent or representative knowingly receive directly or indirectly, any such rebate or
special favor or advantage, provided, however, a licensed insurance agent or a
licensed insurance broker may retain the usual commission or underwriting fee on insurance
placed on his own property or risks, if the aggregate of such commissions or underwriting
fees will not exceed five percent of the total net commissions or underwriting fees
received by such licensed insurance agent or insurance broker during the calendar year.

(emphasis added).

The New York State Insurance Law distinguishes between the ability of
an insurance broker, including an excess line broker, and an insurance agent in the matter
of charging insureds service fees for placing insurance. N.Y. Ins. Law § 2119(c)
(McKinney 2000), which permits licensed brokers to charge insureds additional fees,
provides:

(c)(1) No insurance broker may receive any compensation, other than
commissions deductible from premiums on insurance policies or contracts, from any insured
or prospective insured for or on account of the negotiation or procurement of, or other
services in connection with, any contract of insurance made or negotiated in this state or
for any other services on account of such insurance policies or contracts, including
adjustment of claims arising therefrom, unless such compensation is based upon a written
memorandum, signed by the party to be charged, and specifying or clearly defining the
amount or extent of such compensation.

Accordingly, any additional compensation (e.g., fees, service fees,
origination fees) paid by insureds directly to agents, which is beyond the incorporated
commissions of an insurers filed or manual rates, violates the rate filing and rate
approval provisions of the Insurance Law.

However, an agent who acts as a producer for an automobile insurance
policy placed through the New York Automobile Insurance Plan ("NYAIP")
represents the insured, and acting as an insurance broker, may collect such additional
compensation. N.Y. Ins. Law § 2119(c) (McKinney 2000) and § 21(c) of the NYAIP Rules.

The Office of General Counsel Opinion Letters dealing with this topic
are available on the Insurance Departments web site at www.ins.state.ny.us.

For further information you may contact Associate Attorney Jeffrey A.
Stonehill at the New York City Office.